(FORTUNE Magazine) – THE ECONOMY STINKS, sales are drooping, and just when things can't get much worse, a rival cuts prices to steal market share. Your market share. The textbook says don't panic, just ride it out, match the competition if necessary, and in a month those chowderheads will come to their senses. But suppose they don't. Suppose a competitor lowers prices and then vows not to raise them for five whole years. Insane? Tell that to Taco Bell President John Martin, who has done just that. Taco Bell, a unit of PepsiCo, sells Mexican meat pies, but Martin thinks his slice-and-then-hold-the-lower-line strategy can work elsewhere as well: ''As we figure this thing out, I sure as hell am not going to be constrained to selling Mexican food. There are other consumers in other places.'' That's enough to roil the gut of any fast-food executive. Price wars, once a tool of limited strategic value from the toolbox of limited strategic thinkers, are becoming a depressing fact of everyday life in businesses ranging from autos to credit cards to steel to computers. A growing number of companies are trapped in killing fields of their own making: To protect investments that are too big to write off, they are forced to pursue market share at all costs. Worse, the one real tactical goal of a price war -- to bump off a competitor -- is less achievable these days. The losers don't fold; they're acquired by somebody with deeper pockets or file for Chapter 11 and keep operating. The only clear winners are consumers, who learn to expect ever lower prices. In the supermarkets there's permanent war at the store for items such as coffee, cola, pet foods, paper products, and frozen foods. The price of a top- of-the-line frozen food entree has dropped from $4.50 to about $2.99 over the past year as H.J. Heinz, Nestle, ConAgra, Campbell Soup, and Kraft General Foods battle to jam more products into an overcrowded freezer case. Not surprisingly, profits melt away. In the salty snacks arena, PepsiCo and Borden, entering a third year of warfare, crumbled the margins of their once highly profitable business. Consumer electronics show just how bloody the battleground is. Toshiba's definition of a price war, says a spokesman, is when prices drop every day -- as is happening to laptop computers. ''There's no question computer prices are being cut faster than costs are coming down,'' says Steven Ossad, an analyst with Montgomery Securities. By comparison the ticket slashing in television sets seems mild, just steadily dropping year to year. Even service businesses like training are feeling the heat. ''There has been some out and out pricing competition,'' says Warren Smith, vice president of marketing for the Atlanta Consulting Group. The notion was almost unheard of until recently. Smith sees sharper pricing becoming a permanent part of the environment. One of the industry's fastest-growing companies, CareerTrack, made its reputation by hacking the prices of seminars for which others charged $400 to $49 today. Total quality for half a C-note. Tougher pricing may not be merely the fugue that accompanies recession but the melody of the Nineties, or longer. Research by the consulting firm Bain & Co. shows that the price of almost everything (with the notable exception of health care and education) follows a declining curve in real dollars over time. For instance, the price of crushed limestone, a basic construction material, is riding a 65-year downtrend. The Eighties -- and didn't we all know it -- may have represented an anomaly. When companies realized that President Ronald Reagan couldn't spell ''monopoly,'' never mind understand it, they proceeded to gobble market share through acquisition. The cost was huge, but economic theory says that a bigger share should yield ''rent,'' greater profits from the higher prices that a dominant market landlord supposedly can command. The strategy worked at first, particularly in the food industry, where profits rose 20% yearly. Says Jon Mark, director of the consumer products practice at Bain: ''In the course of the Eighties there was lot of price taking. But you can only get away with it for so long before somebody is going to come in and nail you.'' Borden's current profit crunch in the snack food wars offers an opportunity to see how the nail gun works. In the Eighties the company decided to make a full-scale commitment to the salty snack business. Reasoning: There was but one big national player, PepsiCo's Frito-Lay, which left room for a second. Borden, already the owner of a couple of regional lines, such as Wise and Old London Foods, commenced munching domestic snack food outfits, seven since 1986 alone, until it owned a $1 billion business good for a 12% share. Although that's less than a third the size of Frito, it's at least twice the size of anyone else. There it was: market mass, rationalized production, and raw-material leverage. Profits followed, just as planned. The strategy worked perfectly into 1988, when Anheuser-Busch decided to expand its Eagle Snacks division from niche player to broadly distributed brand. Eagle never wanted to be a price cutter. But as it won shelf space in supermarkets, reportedly by paying retailers as much as $500 a linear foot, competitors fought back. Says Jerry Ritter, executive vice president at Anheuser-Busch: ''In the summer of 1989 we began to see the impact. By fall we knew they had knocked our socks off. So we had to become more competitive.'' When Anheuser targeted Frito's Doritos tortilla chip business, the war escalated to yet another level. Says George Waydo, Borden's president of snack foods: ''You are attacking the family jewels. That's where they draw the line; they crush you. Frito matched Anheuser-Busch on every program. Anheuser has spent $15 million to $20 million in TV advertising and deep-cut promotions, and it doesn't spell 'mother.' '' The Anheuser-Busch division has about a 4% market share but lost $20 million last year. The company expects snacks to be in the black this year, but that won't happen unless the war subsides. Not likely. Says Waydo: ''The snack war is going to continue. And the reason is that everybody has too much money in fixed assets to get out. We probably have more than $500 million, Anheuser-Busch has to have $250 million to $300 million. Who's going to write those assets off?'' THE ACADEMICS call that a barrier to exit. And barriers are now so high in some industries that capacity keeps running when it shouldn't. The greater the market share, the more intent the owner is on preserving it -- and the greater the belief that somebody else will give. Says Kathryn Rudie Harrigan, a strategy specialist at Columbia University: ''The whole system encourages management to be optimistic. The bottom line is that there is usually too much capacity.'' The auto industry is probably the biggest case in point. Says Robert Denner, an auto specialist with Andersen Consulting: ''The business is market share. If you don't have volume, you have a tough time competing. The U.S. has too much capacity, and nobody wants the excess to be his.'' The consumer electronics industry suffers from the double whammy of too many suppliers and too many retailers. Since 1977 the average wholesale price of a TV set has dropped 37% in real dollars to the recent price of $301. Says Stephen Nickerson, director of color television marketing for Toshiba America Consumer Products: ''It's very difficult to show any kind of a profit making or selling TVs.'' Zenith, the last American manufacturer, has lost money in every year save one since 1985. Last year it lost $51.6 million. Consolidation in brand ownership hasn't helped. France's Thomson SA picked up General Electric's RCA and GE brands in exchange for its medical equipment business, plus cash; Dutch giant Philips' Gloeilampenfabrieken bought Magnavox. Two Japanese companies, NEC and Pioneer, dropped out. But the surviving players are giants -- with median annual revenues of about $20 billion -- and each is hellbent to expand market share in televisions. Says Gerald McCarthy, Zenith's senior vice president for sales and marketing: ''Foreign makers have dumped product in order to buy market share. There are no manufacturers making money in the color TV business in the U.S. today.'' The Japanese and Koreans argue the dumping point; in any case, Sony is projecting an operating loss for the year ending in March, while Toshiba's earnings fell an estimated 67%. Meanwhile, electronics retailers are cutting each other's throats even on hot items like big-screen televisions. Says Toshiba's Nickerson: ''It's not Economics 101. High demand and low supply do not always mean a higher price.'' Instead, the retailers look to the manufacturers to provide them with the margin dollars that consumers won't. Part of the problem for the TV manufacturers is that bankruptcy laws are keeping many retailers in business who perhaps ought not to be. More than 15,000 retail outfits were in Chapter 11 last year, and fully 20% of the department stores were owned by companies that are or were bankrupt, led by the then-Campeau-owned Allied Stores and Federated Department Stores. The merged companies recently emerged from court protection. These stores didn't stop selling -- they merely stopped paying off their debts. Desperate for cash, they often resort to lowball pricing, forcing competitors to do the same. The price deflation is a contributing factor to other bankruptcies, such as that at R.H. Macy & Co., which joined the Chapter 11 chapter in January. The survivors aren't going to find the future much easier. By most calculations, there are still too many storefronts. And more are coming, notably lower-cost distributors such as Wal-Mart, warehouse clubs such as Price Co., and category superstores such as Toys ''R'' Us. They continue to operate leaner, forcing prices down. Says Joseph Ellis, partner and retail analyst at Goldman Sachs: ''The warehouse clubs are creating chaos because they are such an effective concept.'' Bankruptcy creates even greater havoc in industries with heavy capital requirements. The 36 airlines that entered the Eighties are now down to 11 currently unprofitable participants and falling. With so many players gone, prices ought to be rising. Yet last year was perhaps the worst in history for commercial aviation's profitability.

The disaster began with the Iraqi invasion of Kuwait, which curtailed travel and pushed fuel prices up. Then came the recession. America West and TWA have joined Continental in operating under Chapter 11. UAL, parent of United, lost $332 million; AMR, parent of American, lost $240 million; Delta, $324 million; and NWA, parent of Northwest, $317 million. Says Northwest's CEO John Dasburg: ''If 1991 has taught us anything, it is that the industry simply cannot continue to price its product below cost.'' Industry executives such as AMR's Robert L. Crandall complain bitterly that carriers that operate under the bankruptcy code are damaging the entire industry. Crandall asserts that the Department of Transportation wouldn't be likely to license a new airline that couldn't finance itself. He's puzzled, he said in a recent speech, that the DOT is ''willing to permit bankrupt carriers, which acknowledge their inability to do so, and whose continued operations threaten the viability of the entire industry, to keep flying forever.'' Such a charge really sets the flaps of Edward R. Beauvais, chairman of America West. ''There's no evidence that supports the excuse'' for the big carriers' bad performance, he says. Beauvais counters that the big boys are actually the predators, charging high prices in fortress hubs while undercutting low-cost competitors to drive them out of business, a tactic he says will eventually raise fares. An America West study of 1,000 city pairs completed during the third quarter of 1990 shows that fares on United, American, and Delta were roughly 5% to 10% above the average industry fares. On flights to and from their hubs, however, these carriers collected premiums as high as 26%. Given such premiums and the Big Three's stranglehold on the reservations system and on hubs such as LaGuardia, O'Hare, and Hartsfield Atlanta, Beauvais asks, ''Why on earth would United be losing money?'' His answer: ''They are using a sledgehammer on the competition.'' United declines to comment. The company did, however, recently announce a 2% price increase. Even if Beauvais's argument is right, the very size of the giants' route structures may ultimately keep competition alive. The hub-and-spoke networks the airlines have worked so hard at constructing now have considerable overlap -- or what a cynic might call overcapacity. Lee Howard, president of Airline Economics, a consulting firm, thinks that pockets of market domination and high prices will continue to exist. But, he says, ''those large networks are so prolific in the industry that it's not going to suffer a great deal from lack of competition.'' Even in industries famous for price-policing, control by a single competitor seems a thing of the past. Witness what happened in steel, where pricing has come full circle since J. Pierpont Morgan formed U.S. Steel in 1901 to stem the pernicious competition of the time. The company kept its legendary ability to rule with an iron fist through the early 1960s. Now a new competitive crucible has produced molten pricing. In 1989 the mills had an outstanding year in sales and earned $1.6 billion in profits. In 1990 shipments increased slightly, yet sales dropped 7% and the industry lost money as producers panicked at the thought of losing share. Imports, the bugaboo of the past, were not a serious factor. ''In '90 we were very close to capacity,'' says Hans Mueller, a steel economist and consultant at Middle Tennessee State University. ''The fact that steelmakers lost money is a kind of a witness to how they go at each other's jugular.'' That year, he believes, shattered whatever pricing discipline remained. Companies focused on maintaining share, even if it meant holding or cutting prices. Adds Roger Penny, senior vice president of steel operations for Bethlehem Steel: ''When you come back into a weaker period, you've got capacity chasing volume. That gave rise to some crazy pricing.'' Mueller calculates that raising prices by 1% that year would have increased industry revenues $400 million -- at least breakeven. The pity is that in steel, as in many businesses, the profit available through higher prices is generally greater than that to be obtained from lowering costs. The root cause of steel's problem is a combination of bankruptcies and continuing pension obligations; any company that wants to get out of the business has to fund the latter, which make it harder to exit than to enter. Says Richard Simmons, chairman of Allegheny Ludlum, a stainless-steel maker: ''Rationalization would take place a lot faster in many industries if it weren't for that 800-pound gorilla called unfunded pension liability.'' In stainless steel some mills have been shut down and some mothballed, but not enough to let survivors boost prices. Says Simmons: ''Our company earned 4.1% net to sales last year. Our peak was over 10% in 1989. We are not forecasting going back to 10% soon.'' One way steelmakers minimize future pension obligations is to sell assets for a song rather than shut them down. Geneva Steel, Weirton Steel, and Gulf States Steel are composed of plants bought from the big integrated outfits. The U.S. Steel division of USX, for instance, reduced future liabilities in selling its Vineyard, Utah, mill to a group of investors in 1987 for $40 million. The new owners quite naturally invested in new equipment, got union givebacks, and headed back to the market as Geneva with 1.5 million tons of revitalized capacity to battle the former owners. Despite some 20 million tons of capacity taken out by Bethlehem, U.S. Steel, Armco, and others in the past ten years, the reconstituted mills have added back an estimated ten million. The vaunted mini-mills have put up an additional five million. Integrated producers like Bethlehem that improve efficiency multiply the grief; the improved yields brought about by continuous casting effectively add two million to three million tons to industry capacity. In the past three years capacity has increased, while prices now trail 1984 levels. FOR MAKERS of consumer products, the danger of a price war is that brand equity -- so expensive to build -- erodes, and products become commodities. That is happening rapidly in personal computers. Historically, prices in the industry fell 15% to 20% a year, driven almost exclusively by technological improvements. Now the annual decline is 25% to 30%, says Benny Lorenzo, a security analyst at Dillon Read. He predicts that the continuing warfare will eventually cut the industry's net profit margins -- now 10% to 13% -- in half. Once determined by capital -- you had to have lots -- the computer industry's structure has become distribution driven, thereby smashing the previously huge barriers to entry. Some 120 competitors have attacked the laptop market. ''If you added up all the people who thought they'd get 5% of the portable market, you'd be at 300%,'' says Grant Johnson, director of product marketing at Toshiba America. Toshiba, which has a 20% market share, tries to sidestep some price competition by offering 20 different products so as to build niches that can't be picked off easily by price pounders. The industry's structural shift has favored latecomers. Says Bill Hayden, CEO of CompuAdd, a clonemaker with $514 million in revenues: ''Second- and third-tier players have grown up in a tight, cost-controlled market. We've always known this ((price war)) would come and that we'd be strong enough to survive, and we've been profitable.'' Hayden, whose company has lowered prices five times in the past 12 months, thinks there's more blood in the turnip. In this atmosphere old-line companies such as Apple and Compaq face a daunting challenge if they wish to maintain both their share and their profits. THERE ISN'T a marketing executive alive who doesn't know the antidote to price wars: Build brand equity for the long term so a company can differentiate its products and command higher prices. But witness what happens when the same executive takes his foot off the price pedal and share starts to fall. In the auto industry, says Andersen Consulting's Denner, ''they all declare they are going to break the habit -- until they have to move some iron.'' Such high-volume cars as Ford's Escort, Chevrolet's Cavalier, and Toyota's Corolla have been locked into a vicious cycle of promotions that has trained consumers to buy a car only when they hear the ads from their local dealer groups hit fever pitch, screaming hysterically about $2,000 rebates and the ''best deals ever.'' Like their brethren in the promotion-happy department store industry, the auto dealers will find it difficult to break consumers of this habit.

Some sectors of the auto industry are succeeding. GM's Saturn is taking the high road, so far. But consider Porsche, the yuppie dream machine that has as much brand equity as it does horsepower. Sales are idling, stalled by a change in values and competition from less expensive Japanese high-performance vehicles. Says David Aaker, professor of marketing strategy at the University of California at Berkeley and author of Managing Brand Equity: ''Porsche has equity but no sales. What do you do -- pack it in? Go downscale? Or weather the storm?'' Welcome to the prisoner's dilemma of pricing. To companies such as PepsiCo, the relentless price competition is a signal that maintaining historical profitability will require radical new approaches to the market and to the cost structure. Taco Bell's sales explosion, 17% last year, came from such a dramatic reconfiguration. It was not simply a matter of lowering prices to stimulate sales. CEO Martin's approach is this: Beyond the link to the customer, everything else is up for grabs. Martin believes that only quantum leaps in productivity will allow his operation to face the price competition of the Nineties profitably. Squeezing costs a penny here or a penny there won't cut it: The hunt for dimes and quarters is under way. Says Martin: ''The industry's cost of goods sold is about 30%. That means for every dollar you spend you are getting 30 cents' worth of food and 70 cents of everything else. That's not very good.'' Customers go to Taco Bell to buy low-cost, good-tasting Mexican food served now -- they don't care how the food gets there or where it's prepared. The difference between cooking foods at the store or delivering cooked food ready to be sold has been described by Harvard business school professors Leonard A. Schlesinger and James L. Heskett as the difference between manufacturing and assembly. Taco Bell decided to become an assembler, consigning to suppliers from outside virtually every other step in preparing the food. Meat and vegetables are now delivered to shops cooked, chopped, and ready for ''assembly'' in pre-fried shells. The savings -- 15 man-hours a day for a typical store -- can be put back into food or pricing. Taco Bell also scrapped its management organization, a hierarchical model that centered on area supervisors, each responsible for five eateries. Says Martin: ''The restaurant business is not brain surgery. It's 1,000 very simple things going on, and one command-control guy is never going to take care of those things.'' To rein in the control freaks, Taco Bell cut the number of supervisors by two-thirds, giving the survivors more stores to handle. Says Martin: ''Trying to do everybody's job at 13 or 15 restaurants, even the greatest barbarian in the system eventually says, 'I finally understand that I can't do this anymore.' '' Store managers and their assistants now have more responsibility for running their operations and serving customers. Thus, the company can enrich these jobs, paying managers more, because costs decrease even as sales increase. FRITO-LAY, too, is in the midst of a shakeup -- a jarring exercise for a company that owns 44% of the snack market, earns a 20% operating margin, and contributes about 30% of Pepsi's operating earnings. Says Roger Enrico, the Frito generalissimo: ''We at Frito-Lay have much to learn from brother Martin.'' In the past year Frito-Lay junked 1,800 staffers, half of them at headquarters, and took a $91 million charge to get itself ready for the new realities.

The company, which used to raise prices religiously, now seeks to expand profits by growing the market with less expensive offerings. In the Southeast, for instance, Frito found that dropping its large bags to ''well under'' $2 from $2.39 increased unit sales by more than 10% and earnings almost as much. The company introduced small 25-cent bags to augment 75-cent packages. The quarter bags pumped up the volume among Frito's lesser vendors. Some that formerly sold $10 to $50 of chips a week now do $40 to $200. Frito is also planning to make further cost cuts. In this industry the finished product is handled by humans twice: Someone packs each bag in a box, and then the route person takes the bag out of the box and puts it on a shelf. Automating the former -- one of the most difficult tasks in the packaged goods industry -- will eventually save $35 million a year. And consolidating deliveries to large customers should knock another $75 million out of the system. Competitor Borden, caught with its prices down, is feeling the chill from the stock market and is stoically redesigning its own organization. Says George Waydo, the snack foods head: ''The conclusion we have had to come to is that business as usual will not work.'' The company is focusing on what the trade calls ''up and down the street'' business, the thousands of small stores and shops where the price competition isn't so intense. Up and down accounts for about half the industry's sales. Like Frito, Borden is retrenching. The company has trimmed its work force by 1,000, is making its delivery system more efficient, and is offering products in a variety of small bags. The company has also reordered its marketing operation, creating specialists to sell specific sizes to specific accounts. For national chains the company will package and advertise some products under the Borden name and give strong regional brands new packaging to enhance their appeal. Says CEO A. S. D'Amato: ''Borden will defend and grow its market position in the supermarkets. We're not going to be the first guy to blink.'' Some markets and companies have benefited tremendously from price wars. The longtime nonstop rivalry of Coke and Pepsi has expanded shares for both and smashed would-be rivals. Nike and Reebok love to attack each other, but in the process they have stomped on Adidas and Puma, once among the world's athletic- footwear leaders. But even premium brands won't be immune from the declining price curve. Don't fight the trend, says Jon Mark of Bain. ''The name of the game is to grow the premium segment, or stabilize it'' -- by cutting costs while letting prices inch down toward commodity levels. The profits generated along the way will open up other opportunities, he says, and leave you free to fight another day. Some industries may have slipped too far down the price curve to put the brakes on. For them the damage may be everlasting, consigning them to a future of commodity pricing and low margins. Consider: Every November, when supermarket managers across America know that each of 90 million households in the country will purchase a turkey for Thanksgiving, harried clerks end up playing a ''whose is smaller'' game with price signs on the entrance marquees. Whatever their cost to the stores, turkey prices fall like frozen Butterballs dropped from a semitrailer. In most years the supers lose money on every turkey they sell. Every year they swear they won't do it again. Fat chance.

CHART: NOT AVAILABLE CREDIT: RENEE KLEIN FOR FORTUNE/SOURCE: ELECTRONIC INDUSTRIES ASSOCIATION CAPTION: A DARKER PRICING PICTURE The miracle of technological advancement? No, it's overcapacity in manufacturing as well as retailing that has forced TV prices down.

CHART: NOT AVAILABLE CREDIT: RENEE KLEIN FOR FORTUNE/SOURCE: NIELSEN SCANTRACK CAPTION: THE CRUNCH IN CHIPS The entry of deep-pocketed competitors such as Anheuser-Busch has made life more difficult for Frito-Lay but a treat for hungry consumers.

CHART: NOT AVAILABLE CREDIT: RENEE KLEIN FOR FORTUNE/SOURCE: AIR TRANSPORT ASSOCATION CAPTION: THE WILD BLUE YONDER Last year was possibly the worst in history for airline profits. But even industry consolidation is unlikely to send ticket tariffs soaring.

CHART: NOT AVAILABLE CREDIT: RENEE KLEIN FOR FORTUNE/SOURCE: ALLEGHENY LUDLUM CAPTION: STEEL'S ROLLING RIDE Higher prices would bring more profits than cost cutting, but pension obligations and overcapacity make market share paramount.